Will China’s Next Data Blitz Confirm a Rebound?

The final verdict on whether the Chinese economy is out of trouble may come on Friday as markets look to a slew of data to confirm the world's second largest economy is on track for a rebound in the fourth quarter.

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The data blitz includes October factory output, retail sales and fixed asset investment numbers as well as producer and consumer price figures. October trade data are scheduled for Saturday.

Over the past month some positive economic reports have raised hopes that a slowdown in the Chinese economy is finally coming to an end. That makes the October data particularly significant as markets hunt for confirmation that China's economy is firmly in recovery mode. The latest numbers will also come against a backdrop of a once-in-a-decade political transition that is taking place.

"The October numbers will be the first of the fourth quarter data, so if positive they will confirm views of a rebound," Alistair Chan, an economist at Moody's Analytics in Sydney said. "It is probably fair to say we will see a recovery in the fourth quarter."

According to Dariusz Kowalczyk, Credit Agricole's senior economist, "the question of China's economy facing a hard landing should not be an issue any more. The October data will point to a pick-up in growth and we should see a bigger acceleration in the November and December numbers."

Economists said the industrial output numbers are probably the most important ones to watch out for. Chan forecasts a 9.8 percent increase in October industrial production from a year earlier. Factory output grew 9.2 percent in September, up from a rise of 8.9 percent in August.

"The investment data will also be key in seeing if the infrastructure stimulus announced recently is starting to show up," said Kowalczyk.

In September, China approved $157 billion worth of investment projects, including 30 infrastructure projects, aimed at shoring up the economy.

Barclays' forecast October fixed asset investment climbed 20.6 percent from a year earlier compared with a 20.5 percent increase a month earlier. And its analysts warn that a sharp rebound in China's economy appeared unlikely at this stage.

Note of Caution

"An uneven recovery across industries and still-soft export orders suggest a sharp near-term rebound remains unlikely," analysts at Barclays said in a note.

They said while October's official and private sector surveys on China's manufacturing sector suggest the economy is finally perking up, the breakdown of the Purchasing Manager's Indices (PMI) indicate growth in exports remains tepid.

China's September exports rose a higher than expected 9.9 percent from a year earlier and Barclays expects data on Saturday to show October exports rose around 10 percent.

"However, the still below 50 reading for the PMI new export numbers suggest more downside than upside ahead," the Barclays analysts said, referring to the 50-mark in the PMI surveys that divide expansion from contraction.

Economists said positive October economic numbers from China would dampen market expectations of further monetary easing from China's central bank, which lowered interest rates in June and July to help lift growth. Beijing has also eased monetary policy by cutting reserve requirement ratios for banks three times since last November.

"It looks like the cycle for interest rate cuts is over, although China may lower reserve requirement ratios once more. It looks like they won't feel the need to cut interest rates, especially with an eye on inflation," said Chan at Moody's Analytics, adding that prices are likely to head higher in 2013.

Credit Agricole's Kowalczyk agreed, saying he expected one further cut in reserve requirement ratios at the most.

"We will see if markets will be pleased with the October data or disappointed that good data will reduce the need for monetary stimulus," he said.